US Yields Flirting With 2007 Highs Entice and Divide Investors

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(Bloomberg) — A surge in longer-maturity US Treasury yields is testing the resolve of global bond investors torn between the possibility of locking in the rates near to the highest levels in decades and the risk of an even greater selloff.

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With Treasury 30-year yields around 5.13%, a whisker away from the highest since 2007, a team at Goldman Sachs Group Inc. sees some emerging measures of value but urges caution. Barclays Plc strategists are warning clients they may breach 5.5%, levels last seen in 2004. The head of BlackRock’s research unit is recommending investors reduce their exposure to developed-market government bonds — including Treasuries — in favor of equities.

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Such views are an indication of a market trying to price diverging outcomes, ranging from the persistent reemergence of inflation amid a resilient economy to a slowdown driven by higher energy prices. It also increases the pressure on incoming Federal Reserve Chair Kevin Warsh and US Treasury Secretary Scott Bessent, who has committed to bringing down borrowing costs. 

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“While I am attracted to the yields, I am cautious,” said Gregory Peters, co-chief investment officer at PGIM Fixed Income. He said he’s underweight 30-year Treasuries based on his expectation that the term premium — the extra compensation investors demand to hold longer-dated debt — will keep rising. “The global bond market is in disarray as investors are losing confidence.”

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Global bond yields have surged in recent weeks as a jump in energy prices caused by the Iran war adds to inflationary pressures and compels central banks such as the Fed to consider raising interest rates. Add in worries over US budget deficits and signs that the world’s largest economy remains resilient, and the result is that investors have been seeking greater compensation to own longer-maturity debt.

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Traders remain on tenterhooks for a resolution to the Middle East conflict, which may yet open a path to a sustainable bond rally. That prospect was on full show on Monday, when long bonds initially sold off during Asian hours to send yields to the highest since 2023. The move later reversed on speculation of a breakthrough in Iran-US negotiations to open up the Strait of Hormuz and with it global energy flows — though subsequent reports later dashed that optimism. 

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Then, toward the end of the New York session, US President Donald Trump created a fresh bid for fixed income by saying he’d called off attacks on Iran scheduled for Tuesday as “serious negotiations” were now taking place. Even so, the moves were contained, with investors wary of another false dawn after several rounds of US-Iran talks failed to produce a sustainable end to the conflict. The 30-year yield was at 5.14% on Tuesday.

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“Value arguments are very fragile right now,” said John Sidawi, a senior portfolio manager at Federated Hermes. It’s predicated on how things develop in the Middle East and if there’s an escalation, “you throw the value arguments out,” he said.